Wednesday, August 1, 2012

Restricting Credit Access to Habitat Families

Habitat for Humanity, an organization with the utmost concern for a low-income family’s ability to purchase and keep a home, recently sent out a Mayday call to the Consumer Financial Protection Bureau, and all eyes are on the bureau to see how it will respond.

Habitat’s concern, expressed in a letter to bureau Director Richard Cordray, centers on a forthcoming rule that, if done wrong, will threaten the nonprofit’s mission. The rule requires lenders to demonstrate that borrowers have met an “ability to repay” test. It will define which “qualified mortgages” (QM) will be presumed to have met this test.

In short, because few lenders will dare make anything but a government-blessed loan, the rule will dictate how most future mortgages will look.

Coming on the heels of an economic crisis in which nontraditional mortgage loans played an unfortunate role, this rule might appear welcome. But as Habitat points out in its letter, a rule that is too narrowly defined will limit the ability of many worthy borrowers to become homeowners.

A historic coalition of more than 30 lender, Realtor, consumer and civil rights groups, including the American Bankers Association, the National Community Reinvestment Coalition and the Community Associations Institute, agrees. The coalition’s members are advocating for a broadly defined QM because they recognize that poorly constructed mortgage rules will dramatically reduce credit availability even to qualified buyers. Department of Housing and Urban Development (HUD) Secretary Shaun L.S. Donovan also has voiced concern that some suggested approaches to QM are too narrow and will restrict credit.

Such consensus is encouraging and, the coalition hopes, persuasive to the bureau. But there is another aspect to the ability-to-repay rule that presents a clear and present a danger to the housing market and, ultimately, the economy. It’s the question of what legal standards will accompany loans that abide by the government’s QM definition.

The bureau is considering two options for those standards: a safe harbor, which allows courts to resolve illegitimate cases more quickly, and a rebuttable presumption, which forces full litigation of every case, even those without merit.

A legal safe harbor is a must. Only a safe harbor provides the predictable, unambiguous legal standards that lenders must have. A “rebuttable presumption of compliance” is a poor alternative that would create litigation risks too great for most lenders.

Habitat emphasizes the high-stakes nature of this issue in its letter to Mr. Cordray. A single adverse legal judgment could wipe out one of its affiliates, which act as lenders as well as builders, it said. There’s simply no way to operate efficiently with that kind of threat hanging over you.

Borrowers also benefit from a safe harbor, which protects their ability to sue in cases of fraud, misrepresentation and wrongdoing. By minimizing litigation, it would keep down the cost of borrowing.

Simply put, a broadly defined QM that includes a safe harbor would ensure that the largest number of creditworthy borrowers can access safe, quality loans for all housing types. In doing so, it would further encourage the housing market’s recovery and help stabilize communities.

The alternative — a narrowly defined QM that puts lenders on shaky legal ground — would have the opposite effect. As a matter of self-preservation, banks would be forced to make only loans that stay well within the boundaries of the rule in order to limit litigation risk. In that scenario, only the wealthy and those with nearly perfect credit scores need bother to apply. As the universe of eligible borrowers is curtailed, mortgage credit will contract, and the nascent housing recovery will stall out.

That’s something the economy cannot afford. Even in its weakened state, the housing sector still accounts for 4 percent to 6 percent of the gross domestic product, according the Yale economist Robert J. Shiller. From home-building, which generates jobs, income and local tax revenue, to homeowner investments in furniture, paint, plants and renovations, the ripple effects of a healthy housing market are extensive. No wonder, then, that HUD and the administration have undertaken so many initiatives to encourage a housing comeback.

Habitat’s letter is a true, albeit pre-emptive, distress call. The bureau should heed the warning and issue a final ability-to-repay rule that encourages, rather than stalls, the recovery.

Pages

Archive

This page contains only posts related to the definition of Qualified Mortgages and Qualified Residential Mortgages (QM-QRM). Click the title banner to return to the main page, which shows posts of all topics.

The ABA Dodd-Frank Tracker provides current information on the implementation of the Dodd-Frank Act. This page contains all posts made to the site, regardless of their topic. For posts addressing specific topics, click the subjects in the menu at the top of the page. For additional topics, see "Full Topics List" in the menu above.

This page contains only posts related to Corporate Governance. Click the title banner to return to the main page, which shows posts of all topics.

The content is provided for educational purposes only, with the understanding that neither the authors, contributors, nor the publishers of this site are engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.

Comments appearing in response to articles appearing on this site do not necessarily reflect the views of the ABA. ABA makes no representations regarding the truth or accuracy of commentary or opinions that may be posted in response to the articles that appear on this website.

ABA does gather and collect information regarding your use in the form of tracking information collected as you navigate this site. ABA aggregates and analyzes this information in order to learn more about how this site is used and how to deliver better products and services. ABA reserves the right to disclose any information as required by law, a court order, or to a duly authorized investigative agency.

The inclusion herein of any link to a website, either in the text of an article or in a comment, does not denote any approval, sponsorship, or endorsement by the ABA, and ABA is not responsible for the content or opinions expressed on those linked websites or related commentary.

It is the policy of the American Bankers Association to comply fully with all antitrust laws. Certain discussions should be considered off-limits, including those that contain competitively sensitive data such as price and cost information, or statements that could be construed as reflecting an attempt or desire to control or influence a particular market or markets. Future pricing or other prospective competitive information should never be shared.